Avoiding corporate spin in the Exxon-Venezuela decision

Here is ExxonMobil (via Reuters):

An Exxon spokesman said in an e-mail on Sunday that the International Chamber of Commerce, or ICC, had ruled that Venezuela’s state oil company, PDVSA, “does have a contractual liability to Exxon Mobil. The ICC award is for $907,588,000.”

Here is a commenter on this website:

“Is very clear that Venezuela lost the arbitartion case: ExxonMobil vs PDVSA on the nationalization Exxon’s assest in Venezuela. The sum awarded is not of relevance for the general business community.”

It’s fine for Exxon lawyers to try and put a positive face on this result. Their jobs are on the line. But please, commenters and journalists, don’t fall for this BS.

The dispute was never whether Venezuela had an obligation to pay ExxonMobil. Venezuelan Oil Minister Rafael Ramírez has said many times that the Venezuelan government knew it had to pay for the assets. The dispute was always over the dollar amount. That is the only thing of “relevance to the general business community.”

Here is the fight: Venezuela said it would pay book value, which was less than $1 billion. ExxonMobil wanted net present value.

Another important element of this dispute, particularly for the oil and gas industry, is the crucial and ever-present question of market value vs book value.

And here is the (summary of the first) decision: Essentially book value plus interest. I haven’t seen the 400-page decision, to know how the panel came up with its figure, but that number is public, and regardless of how the panel came up with its figure, the number is what it is.

PDVSA won. And for those of you who claim to* love Venezuela, you should be happy. This is a lot of money that will could have been redistributed from the people of Venezuela to the shareholders of ExxonMobil — who are doing fine, thanks. (Stock up 14% year over year, market cap above $400 billion, 13% operating margin.) Instead of seeing this as a lost opportunity to spank your bugbear Hugo Chavez, maybe thank your stars that he, and a possible next president of Venezuela just dodged a $6 billion legal bill.

(Anyway, another arbitration decision remains to be seen.)

* Updated Jan. 4 by deleting disparaging word. I know those guys love their country and I shouldn’t have had that word there.

27 thoughts on “Avoiding corporate spin in the Exxon-Venezuela decision

  1. Kepler

    Setty, don’t become hysterical. As I stated previously, it was not that I rejoiced at having Chávez lose one at the cost of Venezuelan children starving to pay Exxon. The questions I asked were because the difference is so huge and so many apparently independent parts seem to bet for either or…you may think the result depended on the lottery or on bribery on either side (think Siemens everywhere, this is not just a Venezuelan thing).

    I know the parts suing usually go for many times the amount the other is willing to pay, but until now what I heard of the issue was that all bets were open. How is this possible? I am an absolute neophyte when it comes to economics and much so law, but these things let me wonder
    Perhaps it’s just one of those like the Cameron versus EU news.

    1. ottorock

      Pointing out facts isn’t being hysterical. It’s pointing out facts.

      1) Vzla said it would pay BV
      2) XOM wanted much more.
      3) Courts say Vzla pays BV.

      So what part of that isn’t a Venezuelan victory?

      1. Kepler

        My point is how half the people who were apparently not parties in this trial but had “some idea” were expecting something else or thought something else was possible at all (and this is NOT a rhetorical question, it’s just from a complete outsider). Either justice in these cases tends to be less kosher and some people were expecting anything depending on the bidder or they were into wishful thinking alone. I didn’t see in the media any remark about “ruling X is expected”, as I do see in other cases.

        1. sapitosetty Post author

          That’s a good question, and gets to the challenge of working in the media on a topic with very little public information. All parties to serious arbitration cases are very closed-mouthed. It has taken me a lot of luck just to get the “memorials” from any of these cases, and they are the official filings. Nobody with any information is allowed to talk. Nobody who talks has any information. All the advance speculation is a matter of more-or-less educated guesswork combined with editors and reporters needing to fill space.

          I don’t completely discount the possibility of corruption here — as you say, it’s a force of nature — but I just don’t see how that would work with a three-judge panel where one of the panel members is appointed by each company, the third is appointed by the two sides together, and each judge can be disqualified based on challenges.

  2. Dr. Faustus

    As per the net amount owed to Exxon-Mobil……

    “Pursuant to that order, approximately US$300 million of PDVSA Cerro Negro funds remain attached until the arbitration procedure is completed. ”

    Well, it’s completed. Therefore, PDVSA would owe Exxon approx 400 million to be paid,….whenever.

    1. sapitosetty Post author

      If you are trying to show your superior knowledge of Venezuelan slang, you win: I have no idea what this is supposed to mean. If you are trying to communicate, you have failed. Please try again.

  3. Editor Petroleumworld

    That was my comment on the subject of a possible corrupted decision.

    By the way Exxon’s other arbitration case in the World Bank arbitration court in much much bigger that this one, it seems the 7 billion dollars figure expected came adding the two cases.

    1. Dr. Faustus

      I’m utterly confused.

      Is there ‘any way’ the ICSID decision could be ‘greater’ than that handed down by the ICC? That makes no sense.

  4. ottorock

    You’re allowed to be pro-Chávez or anti-Chávez in this world. You’re also allowed to be ignorant about all things oil related. It’s at moments like these we get to see who cares more about bile and who cares more about facts. It doesn’t matter which way you’re planning on voting in October, XOM lost, PDV won and anyone who knows a bit about the oil world with an inkling of common sense can see that.

    Unless of course they’re paid to trot out a line of bullshit else fear the wrath of their paymasters.

  5. westslope

    Uh, oh. The appeal to common sense……

    ottorock: Humour me please. I’m in a clueless mood. XOM would have lost even if the compensation had been 3 times as large. The damage is sunk. Courts never recognize full opportunity costs. Never.

    Presumably XOM holds a large world-wide diversified portfolio of productive assets to shelter that company from the impact of state-sponsored takings and other country-specific cataclysmic events.

    Suppose the arbitration panel had given XOM another billion US$. Other than a billion US$, what would XOM have won? If XOM got significantly less than industry standard and expected compensation, please throw out some figures and suggest why.

    Here’s my ‘best case view’:
    + The payout will be prompt.
    + Venezuela will promptly respect all arbitration decisions in future cases.
    + This news demonstrates just how Venezuela remains committed to property rights, the sanctity of contracts and due process.
    + This news slots in a trend where the government softens and warms attitudes to multi-national resource companies. Contract terms are improving (see this blog elsewhere). The threat of expropriation and other forms of taking have greatly subsided.

    Well, maybe the real world is not quite so rosy. Naturally the best case view is influenced by wishful thinking. In any event, it is unlikely to garner a big following in North American capital markets where the Chavez brands wears heavily.

    Happy new year to all and thanks to the setty for doing this.

  6. moctavio

    Of course Venezuela won, after all, it is usual for these arbitration Courts to award book value (the only two cases in which Venezuela had lost previously at the ICSID were book value awards: SAIC and Autopistas), the only reason the companies sued for more is that Venezuela’s laws say it has to be valued as an ongoing concern (Empresa en Marcha). Thus, Venezuela/PDVSA managed to win and have the arbitrator ignore Venezuela’s laws. Big victory and little money for Venezuela to keep these companies. There is another suit on the same issue at the ICSID, which could be higher. Essentially, this was the minimum that Exxon could have expected.

  7. Dr. Faustus

    Oh my, that was an interesting point. Thanks for posting that. Fascinating stuff.

    So, Exxon decided to make their investment at Cerro Negro based on ‘Venezuelan law’ and the financial protection it would have afforded had they run into political/financial problems (which they did). But, how can the ICSID ruling be ‘higher’ when a precedent has already been set?

    1. moctavio

      In the past ICSID has ruled on ICC awards, sometimes companies sue in one, then in the other, very confusing. Each has a different set of rules. I am still trying to talk to a lawyer that can explain how you can sue over the same issue in two different arbitration courts.

      BTW, everyone is spinning, here is the Venezuelan Government:

      Venezuela said Monday it has
      successfully defended itself in an international arbitration
      case brought by Exxon Mobil Corp. and will need to pay only
      $255 million of the more than $900 million awarded to the

      Of course, this is because US$ 300 million was blocked in the US and will be handed over to Exxon and because some counterclaims Venezuela won to the tune of US$ 160 million. But the US$ 300 million was PDVSA’s…

      1. sapitosetty Post author

        Yes, PDVSA’s spin is just as ridiculous. Thanks for pointing this out. It’s like, what, you didn’t do well enough? You need to pretend that those $300 million was already lost?

  8. Al

    As I understand it…
    Exxon filed the ICC arbitration AGAINST PDVSA for the investment it made on the Cerro Negro pjt. (i.e. around $900 million), which was a joint investment with PDVSA. The contract with PDVSA established the ICC arbitration as the means to resolve COMMERCIAL disputes related to this investment. The Commercial dispute addressed the value of the assets taken over by PDVSA ON ORDERS from the Vzla. Government.
    Exxon filed the ICSID arbitration AGAINTS VENEZUELA for the expropriation OF THE GOING CONCERN under the Dutch-Venezuelan BIT, which covers both the investment AND the LOST PROFITS. The decision to expropriate the Cerro Negro Project was the government’s, not PDVSA’s (PDVSA is a corporation whose sole owner is the Venezuelan estate/people, and is managed by the Governement, i.e. the Government Minister in charge of petroleum is the Chairman / CEO of PDVSA). Therefore, Exxon could not go againts PDVSA for the LOST PROFITS.
    Any award to Exxon by te ICSID would have to be net of whatever award under the ICC ruling regarding the value of the assets.

    1. sapitosetty Post author

      This sounds possible, but I guess I was relying on the statement in the PDVSA annual report, quoted in my first post on the topic. There, PDVSA says the initial claim in this arbitration was the full $12 billion. If you are right, and it sounds like you know what you’re talking about, the big hit may come after the Venezuelan presidential elections. Interesting.

  9. Francisco Toro


    Hey, I should read your blog more carefully, I almost missed the little side-swipe at me at the end there!

    But no, I don’t think I accept it. I don’t think it’s patriotic to cheer a decision that rewards the government for thuggish behavior. Communicating to chavismo that violating its contracts is cost-free (or, at least, low-cost) is very much giving a treat to your dog right after it shits on your carpet. It’s myopic to see that as “a win for Venezuela”, because the biggest threat to Venezuelan prosperity in the long run is the ongoing erosion of rules-based governance – a government that faces no penalty for pissing all over its obligations to ExxonMobil is a government with carte blanche to screw its own constituents, too.

    In any case, if -as seems to be the case- the real deal is over at ICSID, then this back-and-forth might just be premature. But still…

    1. sapitosetty Post author

      I see what you are saying. I guess there’s no need to cheer the decision, it just is what it is, and the next decision could be much bigger.

      I agree that it would be nice if the world were moral, and misbehaviour by both governments and corporations led to a spanking by some higher power. But it isn’t. And in this case, that’s good, because the spanking wasn’t going to be on Chavez’s bottom, but on the bottom of the most vulnerable people in Venezuela.

      1. Juan Cristóbal Nagel

        Questioning our love of Venezuela for some supposed reading of this news that isn’t even there in Quico’s post is below the belt.

        I understand your point, but there is no need to point at us. Nothing in the post, and nothing really in the comments, suggests we think this is bad for Venezuela.

        1. sapitosetty Post author

          Juan Cristóbal, I know you (and probably your readers too) love Venezuela. I didn’t mean to cast any doubt on that and I apologize for saying “claim.” That was some sloppy writing — I had that there and then later thought to put in the link, and didn’t change it.

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